Dividend Recapitalization

What Is Dividend Recapitalization?

A dividend recapitalization (otherwise called a dividend recap) happens when a company assumes new debt to pay a special dividend to private investors or shareholders. This typically includes a company owned by a private investment firm, which can approve a dividend recapitalization as an alternative to the company proclaiming ordinary dividends, in view of earnings.

Figuring out Dividend Recapitalization

The dividend recap has seen dangerous growth, basically as a road for private equity firms to recover some or all of the money they used to purchase their stake in a business. The practice is generally not viewed well by creditors or common shareholders as it decreases the credit quality of the company while helping just a chosen handful.

Prior to exiting a portfolio company, some private equity firms and activist investors opt to cause extra debt on the balance sheet of the company to deliver early payments to their limited partners as well as managers. This lessens the risk for the firms and their shareholders.

This special dividend, notwithstanding not funding the portfolio company's growth, weighs further on its balance sheet as leverage. Critical new debt can possibly turn into a drag in adverse market conditions, following the company's exit.

Yet portfolio companies chose for dividend recapitalizations have generally been generally sound and able to endure extra debt. This is ordinarily due to new turns of events, moved for by private equity supports, which produce more grounded cash flows. The solid cash flows enable private equity supporters to get immediate partial returns on their investment since different roads of liquidity, for example, public markets and mergers, take additional time and exertion.

Dividend recapitalizations arrived at a high during the 2006-2007 buyout boom.

Illustration of a Dividend Recapitalization

In December 2017, Dover Corp. announced that it would [spin off](/side project) its oilfield services business, Wellsite. Wellsite would turn into a separate company, zeroed in on specialized equipment - specifically, artificial lifts, which squeeze the last drops from oil wells after they've been completely bored. As part of the creation of this distinct entity, parent company Dover arranged a dividend recapitalization of ~$700 million, leaving Wellsite with long-term debt of 3.4 X EBITDA. While ordinary dividends go to the preferred and common shareholders, in this model, the dividend funded a $1 billion buyback for Dover's benefit, upheld by activist investor Third Point, LLC.

Highlights

• The dividend diminishes the risk for the PE firm by giving early and immediate returns to shareholders yet increments debt on the portfolio company's balance sheet.
• Dividend recapitalization is the point at which a private equity firm issues new debt in order to fund-raise to pay a special dividend to the investors who helped fund the initial purchase of the portfolio company.
• A dividend recapitalization is a rare occurrence, and not quite the same as a company pronouncing customary dividends, derived from earnings.
• A dividend recapitalization is in many cases embraced as a method for freeing up money for the PE firm to reward its investors, without requiring an IPO, which may be risky.